Chap 4 - Copyright © 2006 Nelson a division of Thomson...

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Unformatted text preview: Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Chapter 4 Market Forces of Supply & Demand Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Markets • A market is a group of buyers and sellers of a particular good or service. • The terms supply and demand refer to the behavior of people as they interact with one another in markets. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. • Buyers (consumers) determine demand . • Sellers (firms, producers, suppliers) determine supply . Copyright © 2006 Nelson, a division of Thomson Canada Ltd. • Market demand refers to the sum of all individual demands for a particular good or service. • Market supply refers to the sum of all individual supplies of a particular good or service. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. • There are different types of market structures. • A competitive market is one in which there are so many buyers and so many sellers that each has a negligible impact on the market price. • A perfectly competitive market: • all goods are exactly the same • buyers & sellers so numerous that no one can affect the market price – each is a price taker • In this chapter, we assume markets are perfectly competitive. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Demand • Quantity demanded , Qd is the amount of a good or service that consumers are willing and able to buy at a given price, P. • When the price of a good increases, you buy less of that good. • We say price and Qd are negatively related. • As P  , Qd  Copyright © 2006 Nelson, a division of Thomson Canada Ltd. The Law of Demand Other things being equal ( ceteris paribus) , when the price of a good rises, the quantity demanded of that good falls. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Other Deter minants of Demand Income 1. When income increases and you buy more of a good, this good is a normal good (or if income falls and you buy less). 2. When income increases and you buy less of a good, this good is an inferior good (or if income falls and you buy more). Copyright © 2006 Nelson, a division of Thomson Canada Ltd. • Most goods are normal goods. Examples of inferior goods include Kraft Dinner (as your income increases, you don’t have to eat KD anymore- you can afford steak) and bus rides (as income increases, you can take a cab or buy a car). Copyright © 2006 Nelson, a division of Thomson Canada Ltd.Copyright © 2006 Nelson, a division of Thomson Canada Ltd....
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This note was uploaded on 06/17/2011 for the course ECON 1B03 taught by Professor Hannahholmes during the Spring '08 term at McMaster University.

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Chap 4 - Copyright © 2006 Nelson a division of Thomson...

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